Turkish Court Rejects Lawsuit to Ban Erdogan’s Party

ANKARA (Bloomberg)–Turkish Prime Minister Recep Tayyip Erdogan survived a court challenge to force him from office, ending months of political uncertainty that threatened to derail the $660 billion economy.

Six of 11 judges on the Constitutional Court voted to close down the party, one short of the seven required, chief judge Hasim Kilic told reporters in Ankara today. Instead judges ruled that the Treasury should partially cut funding for the party’s campaigns as a punishment for violating a constitutional ban on basing government policy on religious edits.

"This decision constitutes a serious warning to the Justice and Development Party," Kilic said. "I hope they will take the necessary lessons from this."

The decision may extend a one-month rally on Turkish markets as investors bet Erdogan would triumph in his latest battle with secularists led by the army. His opponents say his economic success, which includes bringing inflation to a 37-year low of 6.9 percent last year, masks a secret Islamic agenda designed to make Turkey more like Iran.

The lira rose to 1.17 to the dollar, a three-month high, after the decision. Turkey’s stock and bond markets were closed when Kilic made the announcement.

The verdict is "a major setback for the secularists and will strengthen the party’s hand even further," said Ahmet Akarli, an economist at Goldman Sachs in London. `Still the domestic political scene is likely to be prone to intermittent crises."

Turkish stocks and bonds slumped after the trial began in March on concern that the closure of the country’s most popular party since 1965 might jeopardize the political stability required to extend a record period of economic growth and progress toward membership of the European Union.

Markets have recouped most of those losses in the past month, as investors bet that Erdogan’s party would escape closure. The rally continued today, as the benchmark ISE-100 stock index gained 5.6 percent, the most in six months, and yields on lira bonds fell to the lowest since May.

The decision means Erdogan and his 339 lawmakers will probably continue to rule Turkey until the next general election due by 2012. The party has 130 seats more than the opposition combined after it won an election last year with 47 percent of the vote.

"I think this is a solution that will satisfy all sides,"’ said Yarkin Cebeci, an economist at JPMorgan Chase & Co. in Istanbul. "The party will remain in power but will see that it is not omnipotent."

Erdogan’s victory in the trial probably won’t mark an end to hostilities with his secular opponents, particularly if Erdogan presses ahead with policies designed to further strengthen Islam’s influence among Turkey’s 70 million people, said Wolfango Piccoli at Eurasia Group in London, which analyses political risk.

"The key risk is that Turkey may witness a similar crisis in the near future," Piccoli said.

President George W. Bush is banking on political stability in Turkey, which is 99 percent Muslim, to help encourage what he calls democratic change in regional neighbors Iraq, Iran and Syria.

The government plans to press ahead with measures to secure membership of the EU, Erdogan said in a speech at parliament on July 22. The premier has also vowed to continue with a program of state asset sales that helped bring a record $22 billion in foreign investment last year

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